Tuesday, February 02, 2016

Order of No Restitution in Commodities Fraud Was Within Court’s Discretion

The First Circuit dealt disappointment to both sides in a CFTC enforcement action, ruling that a federal district court correctly ruled that an individual had committed commodity pool fraud and failed to register as a commodity pool operator, but did not have to pay restitution. The CFTC did not show that the district court had abused its discretion in declining to order restitution (CFTC v. JBW Capital, LLC, January 29, 2016, Lynch, S.).

Commodity pool fraud. Without registering with the CFTC, John B. Wilson and his company JBW Capital solicited over $2 million from 25 family members and acquaintances and used the funds to trade commodity futures. The trades did not go well, and Wilson issued false account statements to conceal the losses. The scheme eventually collapsed. In the CFTC’s enforcement action, the district court granted summary judgment to the CFTC, finding that Wilson had committed commodity pool fraud under Commodity Exchange Act Sections 4b(a)(1) (general fraud) and 4o(1) (fraud by CPOs and commodity trading advisors). The court ordered a civil monetary penalty, but not restitution. Both sides appealed.

The First Circuit agreed with the district court’s fraud findings. Wilson made numerous false and misleading statements, and the scienter element for “willful” behavior in the commodities fraud context can be met by a showing of “reckless” conduct, without reaching whether Wilson made the statements “knowingly.” That Wilson also lost some of his own money on the trades was irrelevant. The statements were material because there was a substantial likelihood that a reasonable investor would have considered information about the fund’s net asset value and the recovery plan important to his or her investing decisions. The CFTC did not have to show that the investors relied on Wilson’s statements, because reliance is not an element of Section 4b(a)(1).

Failure to register. The First Circuit also agreed with the district court’s ruling that Wilson had failed to register as a CPO, as required by CEA Section 4m(1). Wilson did not dispute that he was required to register, but claimed he had relied on the advice of counsel that he did not need to register. CPO registration is a strict liability offense and has no “state of mind” element, said the First Circuit. Whether or not he believed he was required to register was irrelevant.

Because Wilson was a CPO, he was also liable for fraud specific to CPOs under CEA Section 4o(1).

No restitution. The First Circuit first clarified that restitution includes total losses suffered by the victims, while disgorgement is limited to "the amount with interest by which the defendant profited from his wrongdoing."

Despite the district court’s less than precise language, the circuit court was satisfied that the lower court declined to order restitution because the CFTC did not adequately show that restitution was appropriate, not because it believed it lacked the authority to order restitution. In its original decision, the district court said it decided not to order restitution because the CFTC did not present evidence on the amount of retained profits or ill-gotten gains. In its denial of the CFTC’s motion for reconsideration, the district court clarified that the decision whether to order restitution was within its discretion, and referred to its disagreement with the CFTC as “a difference of opinion.” The district court did not make an error of law, and its choice not to order restitution was not an abuse of discretion, the First Circuit said.